Although you have the opportunity to save a substantial amount in a 401(k) annually, there are limitations set by the IRS. Each year, the IRS establishes clear guidelines for 401(k) contribution limits that both you and your employer must adhere to.

For 2023, the 401(k) contribution limit is $22,500 for employee contributions and $66,000 for combined employee and employer contributions. If you are 50 or older, you can make an additional catch-up contribution of $7,500, increasing your employee contribution limit to $30,000. In 2024, the limits are $23,000 for employee contributions and $69,000 for combined contributions, with the same catch-up contribution allowance.

The Roth 401(k) contribution limits for 2023 and 2024 match the pretax limit for traditional 401(k) plans. If you have both Roth and traditional 401(k) accounts, you can contribute up to the annual maximum across both types. However, if you are under 50, your total employee contributions cannot exceed $22,500 in 2023.

If you have multiple 401(k) plans with different employers, you are still limited to the total employee contribution amount for the year. For example, if you have two plans, you can split your maximum contribution between them.

After reaching the maximum employee contribution, you may consider after-tax contributions, depending on your plan. These contributions can be made up to the total employee and employer contribution limit for the year, provided the existing contributions do not surpass the limit.

Contributing too much to your 401(k) may result in penalties. If this occurs, you must request the excess contributions and earnings to be returned to you by April 15. These excess amounts are considered taxable income.

To determine how much to save in your 401(k), a guideline is to aim for at least 15% of your income each year, including employer contributions. It’s essential to contribute early, take advantage of any 401(k) match from your employer, and work towards saving 15% for retirement.

Maximizing your 401(k) contributions involves contributing early, taking advantage of employer matches, and striving to save 15% for retirement. Additionally, keeping track of your 401(k)s from previous jobs ensures that you make the most of the money you’ve saved over the years.

This article is provided for informational purposes only and should not be construed as tax advice. Consult your tax professional. Source: IRS.gov